Coal prices triple as supply crisis deepens (transcript)

David Strahan: Hello. I’m David Strahan, the author of The Last Oil Shock: A Survival Guide to the Imminent Extinction of Petroleum Man. And this is a podcast from lastoilshock.com, sponsored by Global Public Media, public service broadcasting for a post-carbon world.

Gerard McCloskey, thanks for joining me again. Last week when we spoke you made some fairly bold predictions about coal prices then. What's happened since then?

Gerard McCloskey: Well, in many ways what, in the middle of last week's flood did feel like bold prediction, have been overtaken by events, or nearly matched by events. I thought that is was possible that the FOB prices out of South Africa and Australia could reach—they were $100 a ton—they could reach, why not 120, 130, why not 150? And by the end of Friday the Australian price was already reached $140 a ton, FOB Australia. It has eclipsed what had been the delivered price into Europe. So, the loaded price in Australia had, in a week, overtaken the delivered price into Europe. We've never, ever seen anything like it and there's no reason to believe that's the end of the story.

But even that—even that extraordinary rise in price—has been put into the shade by what's been happening on the coking coal market. Now, coking coal is used in the steel industry; make coke from coking coal, as its name implies—stick it in a blast furnace with iron ore and iron comes out, and subsequently steel.

Now, the current contract price around the world for Australian and Canadian coals—the highest quality coals—and the coal to be delivered between now and the end of March—between the beginning of April last year and the end of March— is struck at $98 a ton. There's a very, very small spot market in coking coal and we've seen prices of $160, $190 a ton on the spot market.

And then the middle of last week, on Thursday, we'd heard that Rio Tinto had done a deal at $211 a ton, FOB Australia—delivered and put into a ship in Australia. Rio Tinto had always been thought to be a relatively weak link on the supplier side and was felt to have helped in severely under performing the market in the previous year with a very low price struck with the Indian steel mills.

And so now we see Rio Tinto setting what is, effectively, a world record for a price: $211 a ton into the ship in Australia. That world record lasted 24 hours. The next thing we see is another Australian producer—so far we are clear that it's been done but the name of the producer is not yet going to be revealed—they did $270 a ton, loaded into a vessel in Australia. And we believe that this week we will see $300 a ton done for coking coal. That's three times the amount of the current contract price of $98. It's quite, quite extraordinary.

For the steel producers—can they cope with this price?—of course then can, because their made product, what's called hot rolled coil steel, their main product price is also at record prices. And its always been felt in the past that the coking coal producers—in Canada, in Australia, and particularly in the U.S.A.— have really just not got what their coal is really, really worth.

This year the first up were the U.S. coal producers and they took bragging rights; they've got $140 a ton, $40 more than the Australians have got. But they now look like they should be confirmed as a charity to the steel industry because it's woefully under what they could have got for their coal and it seems as though the Australian coking coal producers are going to take the blue ribbon on the market this year.

DS: You've explained what coking coal is and does, but in terms of the rest of the world and in terms of the significance to the rest of the world, is this something that we really ought to be worried about or should we actually be concentrating on the steam coal, which is going for half the price FOB?

GM: I think that both those prices, along with all the other energy prices, people should really be worried this is going to fuel inflation.

The odd thing with steam coal is that even at these very high, unprecedented prices we're seeing them undercut the alternative fuels, which is heavy fuel oil—which can be used in some small power stations, and some major power sectors, like Italy, for example, has a big, big oil element—but also natural gas or liquefied natural gas, and particularly on the key Japanese market where you can track imported prices on all the fuels. Coal, at these levels, will be well under any competition.

So you should not see the prices percolate through to higher power prices in most economies. I think in Europe, where you have very competitive electricity economies, though, you will see higher power prices as a result of all this.

DS: But what about climate change emissions? We saw over the last couple of years the rising price for gas actually encouraged power generators, particularly in Britain, to shift into coal and so our greenhouse gas emissions got worse. Do you think their might be some kind of a silver lining here with these price rises actually reversing that somewhat?

GM: I don't think so because these are very short-term elements, and if you're really going to shift over to fuels or power plants which is lower-emitting it takes years to construct it. And there's not a lot of idle capacity which will swing in and out of the system just because of a price movement. Sure, it will have some effect. Sure, there are plants which are on the margin. The differential between goal and gas goes in one particular direction, one type of plant will come in and one type of plant will go off.

I think the interesting battle in the mid-term is whether or not you can get some of these super-critical plants to come on, super-critical coal plants, which are much, much more efficient in their emissions of carbon. And I think the environmental issue is another factor which is: if you get very cheap coal, sure, and your burning it in these old stations we have in Europe and we have in the U.S.A., certainly, carbon emissions are going to go up. But I think it runs in parallel with prices. But I think that the main issues on carbon are really dependent on improved technology for the mid-term.

DS: To come back to the prices, how long to you think these prices are going to stick? Because I know from my time covering the financial markets that sometimes you can get sort of aberrant prices, spikes which are not terribly meaningful; they don't stick around for too long. What do you think is going to happen with these prices? Are they going to disappear?

GM: I think with coking coal I think you're going to get a very high contract settlement when the Japanese and European mills sit down with their suppliers simply because the shortage of coking coal is going to go on for 2, 3 or 4 years. And it's going to go on until the Australians get their railroads and ports together. There's enough coking coal there, but moving it to the market is very, very difficult.

I think with steam coal, in the short term, I think that the issue is: can the U.S. market—while on the internal U.S. market prices are much, much lower—can the U.S. swing back into the Atlantic market? Now, we're beginning to see the beginning of that. But what we don't know is whether the U.S. has got the same problems that the Australians have got—lack of railroads, lack of ports—whether they've got sufficient spare port capacity and sufficient spare rail capacity to swing a lot of tonnage back into the Atlantic, which will have a depressing effect on prices. But that's going to take months rather than weeks to have a real effect.

So I think that we'll see these very high price levels continuing at least for 6 months.

DS: And in steam coal as well, is there this impact of long-term contracts being signed and, therefore, making these high prices, which are happening for rather short-term reasons, making them persist for rather longer than we might expect?

GM: The difference between the two is the coking coal contracts are—for 95% of the business—are annual contracts. For steam coal in some of the markets, particularly throughout Europe, their price is set by the hour; there's a completely fluid market. In Asia you do get some contract prices, particularly into the big markets of Japan, of South Korea, Taiwan, and one or two other places. But there, too, you tend to get people purchasing stuff vessel by vessel.

DS: Okay, to sum it up, what do you think is going to be the impact really on the European coal market, particularly in steam market and power prices? What do you think all this stuff means at the end of the day?

GM: At the end of the day I think that the consumers, the power companies are just going to have to lump it. They're going to have to swallow these high prices. They've had a break; we did see a fall in ocean freights and so the delivered price looks like coming down. But those falling ocean freights have been overtaken by the loaded prices in the countries of export. So I think that they're just going to have to swallow these prices, certainly for the next few months.

DS: Power prices are already going up, of course, in part because of the oil and gas drivers, certainly in the British market. Could this just be something else to add on to that? I mean, the power companies do seem to be able to pass on their cost increases.

GM: I don't think they've got any choice. I think that the fuel import prices are a main part of it. A lot of the power stations are old and have been written off, amortized, a long time ago, the investment. So the variable price, the fuel import price, is the main element on what the power price is going to be and they're just going to increase.

DS: And to be clear, do you think these increasing coal prices are actually going to feed through to the wholesale and retail electricity prices?

GM: Yes. It's inescapable.

DS: Gerard McCloskey, thanks very much for joining me.

GM: Cheers.

DS: You’ve been listening to a podcast from lastoilshock.com, sponsored by Global Public Media, public service broadcasting for a post-carbon world.